Asia is Undergoing Structural Reconfiguration, Creating New Opportunities Across Multiple Economies

Overview

Nomura Securities has released its core report, 'Reconfiguring Asia,' which argues that the world is transitioning from a unipolar to a multipolar order, compounded by China's rise and the AI revolution, leading to deep 'rewiring' of the Asian economy. The report identifies eleven key themes encompassing trade and investment reconfiguration, geographically driven FDI, managing 'China Shock 2.0,' the AI revolution, energy security, rare earth supply chains, defense revival, the sustainability of China's export model, Japan's economic resurgence, de-dollarization, and the impact of advanced-market interest rates. Overall, China, Malaysia, South Korea, Australia, and Singapore are identified as the primary winners, while the Philippines, Thailand, and Indonesia face significant challenges.

Core views

The report contends that Asia is undergoing a transformation driven by multiple structural forces. **Reconfiguration of Trade and Investment Patterns**: Global supply chains are slowly but decisively restructuring, with Vietnam, India, and Malaysia emerging as primary beneficiaries. India excels in automobiles, pharmaceuticals, EMS, and power equipment; Malaysia benefits from a wave of multinational corporate investments in real estate, construction, utilities, and technology manufacturing. **Geopolitical Shifts in FDI Flows**: Foreign direct investment is no longer solely driven by efficiency but increasingly by geopolitical alliances. Singapore, India, Malaysia, and Vietnam benefit from strategic neutrality or flexible positioning. However, massive Asian investment into the U.S. (e.g., commitments by Korea, Japan, and Taiwan to invest hundreds of billions in U.S. manufacturing) may hollow out domestic manufacturing capacity. **'China Shock 2.0'**: China continues to expand its export share in high-value-added sectors such as electric vehicles, batteries, photovoltaics, engineering machinery, and shipbuilding, posing threats to low-value-added manufacturing nations like Indonesia, Thailand, and the Philippines, and intensifying competition with South Korea (shipbuilding) and Japan (engineering machinery). **AI Revolution Reshapes Growth Landscape**: AI hardware producers (China, South Korea, Taiwan, Malaysia) will benefit first, while Japan and Singapore will catch up through AI applications and productivity enhancements. India, Indonesia, the Philippines, and Thailand face the challenge of transforming AI from a competitive threat into a productivity driver. **Energy Security and Green Transition**: Conflicts in the Middle East have accelerated Asia's focus on energy security. China benefits from its leadership in green technologies (accounting for 40% of global exports); ASEAN and India are rising in solar panel production; South Korea leads in lithium battery exports; Australia and Malaysia benefit from rising LNG export demand. **Japan's Economic Resurgence**: Japan is undergoing an internal transformation through the 'Three Rises' (prices, wages, interest rates), reduced reliance on labor-intensive capital expenditure, and sustainable wage growth. The report is bullish on ultra-long-term Japanese Government Bonds (JGBs), yen appreciation (projecting USD/JPY at 145 by end-2027), and thematic stocks in robotics, content, and brands. **De-dollarization Trend**: Over the medium term, the U.S. dollar is expected to weaken, with the eurozone, Japan (driven by portfolio inflows), Singapore (as a relative safe haven), the RMB (for trade settlement), and gold (driven by central bank demand) emerging as alternatives.

Analysis framework

Nomura's methodology involves identifying and analyzing the eleven 'rewiring themes' driving paradigm shifts in the Asian economy. Each theme is examined across three dimensions: macroeconomic impact, country/industry-level vulnerabilities or benefits, and specific investment opportunities. The report integrates qualitative judgments (e.g., geopolitical alliance mapping) with quantitative models (e.g., national vulnerability scorecards, AI production/adoption scores, energy security indices) to translate complex macro narratives into actionable investment insights. Ultimately, cross-theme comparisons identify regional 'winners' and 'losers,' providing clear allocation guidance for investors.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply and Demand Framework

  This industry is fundamentally driven by supply

  In analyzing China's export competitiveness, the report emphasizes China's supply-side advantages—including low electricity costs, domestic deflation, and a complete supply chain—that enable it to sustainably export high-value, cost-effective products despite external demand friction.

• Cycle and Sentiment FrameworkBusiness Cycle Turning Point Analysis

  Productivity J-Curve

  The report introduces the 'Productivity J-Curve' concept to explain the macroeconomic impact of the AI revolution: early AI adopters incur high transition costs (organizational restructuring, data infrastructure), leading to short-term productivity declines before significant gains emerge. This explains why AI production economies (e.g., South Korea, Taiwan) enjoy early hardware export gains, while adopters (e.g., Japan, Singapore) experience delayed benefits.

• Macroeconomic frameworkMundell-Fleming Trilemma

  Trilemma

  In discussing the impact of high interest rates in advanced markets on Asia, the report implicitly applies the 'trilemma' logic: countries with current account deficits (e.g., Philippines, India, Indonesia) will find it harder to maintain exchange rate stability under capital outflow pressures, potentially forcing them to raise rates or deplete foreign reserves.

• Industry/Industrial Analysis FrameworkUpstream-Midstream-Downstream Chain Transmission

  Position in the supply chain determines benefit sequence

  In the AI revolution theme, the report clearly distinguishes between 'AI production' and 'AI adoption' and notes that economies positioned in the upstream segment of the AI hardware supply chain (e.g., chips, server components) will benefit earlier and more directly from capital expenditure cycles than downstream application providers.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• ModernRotem (064350 KS)

  A primary beneficiary of South Korea's defense export growth, expected to secure substantial new overseas orders

  Strengths

  Competitive in main battle tanks and rail vehicles, benefiting from the drone-driven tank replacement cycle

  Comparison

  Preferred stock among covered South Korean defense companies

• Mitsubishi Heavy Industries [7011 JP]

  Core player in Japan's defense industry, benefiting from increased missile and naval vessel orders

  Strengths

  Leading player in missiles and naval vessels; defense-related business expected to account for 30% of company profits

  Comparison

  Core defense stock alongside Kawasaki Heavy Industries

• Hindustan Aeronautics (HNAL IN)

  Direct beneficiary of India's 'Atmanirbhar' (self-reliant) defense policy

  Strengths

  Backlog of INR 2.54 trillion; delivery of LCA Mk-1A orders will be a near-term catalyst

  Comparison

  Preferred stock in India's defense sector

• CATL (300750 CH)

  The world's largest battery manufacturer, benefiting from China's 'Three New Items' export surge

  Strengths

  Number one globally in both power and energy storage batteries; overseas revenue accounts for approximately 28%

  Comparison

  Leader in China's ESS/battery sector

Key data

• CAGR of China's 'Three New Items' Exports35%2020-2025, for electric vehicles, lithium batteries, and photovoltaics
• China's Share of Global Shipbuilding Order Bookings~60%First half of 2025
• China's Share of Global Green Technology Exports40%Including electric vehicles, solar panels, and battery systems
• Target Defense Spending as % of GDP for South Korea and Japan3.5%, 2%South Korea aims to reach 3.5% soon; Japan has already achieved the 2% target a year ahead of schedule
• Projected USD/JPY Exchange Rate by End-2027145Reflects expectation of yen appreciation

Impact & implications

These structural shifts imply vastly different futures for Asian economies. For China, despite external friction, its export-driven model remains resilient due to strong supply capabilities in AI infrastructure, green technologies, and intermediate goods, positioning it as the largest 'winner.' For Japan, this is an opportunity to escape deflation and revive its economy. For emerging AI producers (e.g., Malaysia) and trade diversion beneficiaries (e.g., Vietnam, India), this is a strategic window to accelerate industrial upgrading and integrate into higher-value global value chains. However, low-income economies lagging in AI adoption and highly exposed to 'China Shock' (e.g., Philippines, Thailand, Indonesia) risk marginalization unless timely policy adjustments are made.

Risks

• Increased external friction facing China's export model may worsen trade conditions
• Some Asian economies (Philippines, India, Indonesia) with current account deficits are vulnerable to capital outflows amid high advanced-market interest rates
• AI adopters may face temporary productivity declines during the initial transition phase due to the 'J-curve' cost
• Massive Asian investment into the U.S. may lead to 'hollowing out' of domestic manufacturing capacity

What to watch

• Progress in investments in AI infrastructure (data centers, computing power)
• Progress in diversifying critical mineral supply chains, such as rare earth processing
• Sustainability and stickiness of Japan's 'Three Rises' (prices, wages, interest rates)
• Trade friction and policy developments between China, the U.S., and Europe in green technologies